I met a prospect a few days ago in Chicago, and explained to him among other things, our mutual fund selection process. He was interested to know, when we recommend selling a mutual fund scheme we have invested in. I do believe that selling decisions are more difficult than buying calls. It is true of most investments that I can think of: we do a detailed research to buy that latest vehicle but even when the cost of repairs and maintenance are high, we cannot get ourselves to get rid of it. The reasons, I feel, are that we develop an emotional attachment to the asset and secondly, we do not like selling at a price lower than the purchase price.
KEEP A LONG-TERM APPROACH
One needs to understand the way a mutual fund works. Or at least the way it doesn't: it is not a share where you buy and sell to make a profit. We have entrusted our money with the fund manager and expect him to use his expertise and the systems of the fund house to ensure that he invests judiciously. The fund will trade in stocks, in line with the investment mandate, and we as investors will enjoy the gains from this activity. As a financial planner, we focus on the strategic allocation of your funds: how much should be in equity, of which, what should be the share of large cap funds etc. The aim is to select the right scheme for the long run so that there is minimum churn. Yet, there could be reasons to recommend an exit. Before we consider your own circumstances that warrant a change, let us examine market or external factors first.
EXTERNAL EXIT TRIGGERS
There could be an error in the selection itself. We have selected some schemes in the past based on 'star' fund managers and found that when the tide turned in the markets, they did not have the systems to execute Plan B, and after some time, they jumped ship. That is an obvious reason for exit. The more dangerous situation is when the fund manager takes more (or less) risk than mandated. For example, a large cap fund may swing 40% of its investments into mid-cap stocks as that's where returns are being generated. Financial planners frown on this practice as this could leave their investors marooned. Allocation is a discipline that must be followed fanatically.
Obviously when an asset class rises more than planned, that could be another reason to take profits off the table. There could be a tactical call to reduce weights in mid-cap funds, or invest in thematic funds which could warrant a switch as well. But the more fundamental reasons would be your personal needs or goals.
INTERNAL EXIT FACTORS
If you have been dealing with your advisor since long, you would have shared your requirements with him. We, for example, would like to move funds from the equity asset class to safer avenues in a staggered manner where we know the requirements would be coming up in the next 12 to 18 months. In more volatile times, this period could be enhanced. That way, one can identify fixed income options to invest the money and meet your desired goals. If you get the allocation right, you will be 'booking profits' regularly and sleeping well at night. After all, isn't peace of mind the main reason you signed up a financial planner for?
